Closing costs – a term often associated with vague estimates tied to the purchase price. Let’s clear the air on this common misconception and understand why percentages fall short when estimating these expenses.
Closing costs aren’t a simple percentage of the loan or purchase price, and here’s why – The variable nature of expenses plays a significant role. Various components, such as appraisal fees, lender fees, and inspections, don’t follow a fixed percentage scale.
Many closing costs, like appraisal fees and settlement fees, remain flat regardless of your purchase price. For example, a $475 appraisal fee on a $120k home is 0.39% of the loan amount, but it becomes 0.12% on a $400k loan. Some costs, like lender fees, are fixed but may seem a higher percentage for smaller loans. As your loan amount decreases, these fees become a larger percentage of the purchase price.
Closing costs are also influenced by the time of the month you close. Prepaid interest, for instance, depends on the number of days between closing and the end of the month.
Closing costs are complex and can’t be estimated as a one-size-fits-all percentage. Consult with your lender early in the process to gain clarity on the specific costs tied to your unique situation. Don’t let misconceptions cloud your negotiations. Understanding the nuances will empower you in your home-buying journey. Before you submit an offer or engage in negotiations, call your lender to make sure you understand what your closing costs may add up to and what your financing limitations are.